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Adams hires EY Australia to run ruler over Chorus books

Friday 15th November 2013

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Communications Minister Amy Adams has hired Ernst & Young Australia to investigate Chorus's financial position after the Commerce Commission ordered price cuts to the network operator's copper lines.

Adams has tasked the accounting firm to assess the impact of the final regulator's decision on Chorus's financial indicators, including earnings before interest, tax, depreciation and amortisation, net operating cash flow, debt ratios, borrow lines and borrowing costs now and over the build period for the taxpayer-sponsored ultrafast broadband network and rural broadband initiative, according to the terms of reference of the review. The impact of the regulator's decision is to be distinguished from Chorus's own choices.

Once that's done, EY will have to identify the financial capability of Chorus against regulator obligations and the contractual obligations, while accounting for any adjustments the Wellington-based company could undertake to strengthen its books, including tweaks to operational costs, capital cost structures, debt facilities and its dividend policy.

"The immediate concern to the Government is if its UFB and RBI contracts are at risk," Adams said in a statement. "The findings of the independent assessment will help to inform any decisions the government needs to make to ensure the successful delivery of the UFB and RBI projects."

EY has until Dec. 6 to provide a draft report, with the final report due by Dec. 12.

The government may also commission work from an investment bank on the likelihood of a successful capital raise by Chorus to meets its obligations, the terms of reference said.

Chorus shares rose 2.5 percent to $2.02, and have shed a third this year.

Adams is mulling how to respond to Telecommunications Commissioner Stephen Gale's planned 23 percent price cut for access to Chorus's regulated copper lines, which the network company says will force an overhaul of its capital structure, and may threaten to derail the taxpayer subsidised build of national fibre cable infrastructure.

Complicating matters further, telecommunications company CallPlus has filed proceedings in the High Court in Wellington seeking a judicial review and declaratory judgment that the government's review of the Telecommunications Act 2001 doesn't actually comply with the law.

Adams ordered up the review as part of the government's response to the Commerce Commission's draft price cuts in December last year and has said the government was concerned that the economics of the fibre network Chorus is building could be undermined if the cuts were too steep.

In delivering his final decision, Gale ceded some ground so as to not underestimate the regulated price, which could deter investment in fibre. Still, he said his view on pricing was based on the commission's interpretation of the law as it currently stands, which set an initial price using international comparisons.

Chorus has said it will take up its option to seek a full cost review, which would base the regulated price on the full economic cost of the wholesale service.

Legislation introduced in 2011 to enable Telecom to demerge its Chorus unit and free up the network operator to win the lion's share of a $1.5 billion subsidy to build the ultrafast broadband network required the regulator to make 'reasonable efforts' to complete its pricing determination by December 2012 to derive a cost model by December 2014.

Before the structural separation, regulated pricing for the UBA services were determined using Telecom's retail broadband service plans. After the split, a new cost-based model was deemed appropriate.

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